Nevada city rejects eminent domain plan for mortgages

September 05, 2013|Reuters

By Jim Christie

SAN FRANCISCO, Sept 4 (Reuters) - The city council in NorthLas Vegas, Nevada, on Wednesday rejected a plan to use eminentdomain if necessary to help refinance "underwater" mortgages, anidea the mortgage industry opposes at a time when propertymarkets are recovering.

The council voted 5-0 against the plan proposed by MortgageResolution Partners (MRP) for a partnership with North Las Vegasto buy the mortgages or seize them through eminent domain, amove critics said would unsettle the market for private-labelmortgage-backed securities and push mortgage interest rates up.

City Councilman Wade Wagner questioned the San Franciscoinvestor group's proposed use of eminent domain for acquiringdelinquent and performing underwater loans. A mortgage is underwater when its unpaid balance is more than the market value ofits property, a common problem in Nevada's third-largest city.

"They want the performing mortgages they assume will defaulttwo, three, four years down the road. That's a mighty bigassumption with property values climbing," Wagner told Reuters.

MRP's plan for North Las Vegas was similar to its plan forRichmond, California, another city hit hard by the mortgagecrisis. But Richmond may back MRP's plan, which has prompted alawsuit by investors holding mortgages targeted by it. InRichmond's case, eminent domain would be invoked in an effort toward off blight, targeting more than 600 mortgages to preventborrowers from defaulting on them, according to its leaders.

MRP has proposed that eminent domain can be used if holdersof underwater mortgages do not sell them to cities at a discountpegged to their properties' current value. Then the loans can berefinanced and made less costly for their borrowers, MRP says.

In a report for North Las Vegas, MRP said the city risks2,500 foreclosures from underwater mortgages in private-labelmortgage securities and offered to help acquire and refinanceloans from a group of more than 3,900 mortgages.

MRP says it aims to help housing markets, but critics pointout it could earn $4,500 for each mortgage its refinances.

Earlier this year, San Bernardino County, California, andthe cities of Fontana and Ontario, declined a tie-up with MRPafter lobbying by financial institutions and local businesses.

A rebound in the housing market also helped block MRP in SanBernardino County, said Paul Herrera, an official with theInland Valleys Association of Realtors: "That really destroyedthe argument that the housing market could only recover withdrastic action."

The median sales price for a home in California's InlandEmpire - San Bernardino and Riverside counties - rose 31 percentto $262,000 at the end of the three-month period ended in Junefrom the same period a year earlier, Herrera said.

Home prices in North Las Vegas are also up. The median salesprice for all residential properties in the city rose 23 percentto $142,500 from May through July from the same period a yearearlier, according to online real estate marketplace Trulia.

In Richmond, investors holding mortgages targeted by thecity are pressing a lawsuit through trustees Wells Fargo & Coand Deutsche Bank AG to block the city from implementing MRP'splan, which they say would make an illegal application ofeminent domain.

The plan has also drawn fire from the Federal HousingFinance Agency, which has warned it would direct Fannie Mae andFreddie Mac to "limit, restrict or cease business activities"where eminent domain is used to seize mortgages.